The market worm turns

08/25/21
  • CARA up big on Tuesday on heavy call volume
  • Company received FDA green light for one of its drugs
  • Broader options activity and price pattern pointing in different direction?

Have you ever seen an anglerfish at work? This strange-looking denizen of the deep has what amounts to a fishing pole sticking out of its forehead, at the end of which is a little lure it dangles in front of its toothy jaws, enticing hapless victims into going where they shouldn’t.

Markets often do the same thing—waving something attractive in front of traders who often feel pressured to make quick decisions about what could be a fleeting opportunity. But no sooner has the fill confirmation flashed on the screen than the market abruptly reverses course, leaving the unsuspecting trader wondering what happened.

Early Tuesday, for example, Cara Therapeutics (CARA) was on top of the list of stocks with unusual call options volume. About an hour into the trading session, with shares up around 5% amid news that the Food and Drug Administration had approved its treatment for the severe itching that often accompanies kidney dialysis,1 calls were trading at nearly 34 times their average pace:

Chart 1: LiveAction scans: Unusual Call Volume (top), Unusual Put Volume (bottom). Unusual options activity. Calls in demand…but so are puts.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


On the face of it, that all sounds pretty bullish—good news on the business front, stock higher, lots of activity in calls. But the bottom half of the chart shows that beyond this first impression, put volume, while lower than call volume in absolute terms, was almost 87 times its average daily total.

The stock’s price action also made things look a little fuzzier. CARA had jumped as much as 28% in the first few minutes of trading, which means that even though it had a seemingly robust 5.3% gain around 10:30 a.m. ET—and had jumped to its highest level since April—it had fallen 18% from its high and was trading near the bottom of the day’s range:

Chart 2: Cara Therapeutics (CARA), 10/30/20–8/24/21. Cara Therapeutics (CARA) price chart. Huge intraday rally shrinks.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


While it can be difficult to find comparable examples of such extreme price action—CARA has had only four intraday rallies that were bigger than yesterday’s—the historical record suggests that traders enticed by this type of seemingly bullish price move may want to exercise caution, at the very least. For example, since 2014 CARA has made a five-day (or longer) new high while trading at least 10% above the previous day’s high 31 other times. Two weeks later, the stock was lower in 20 of those cases (65% of the time).2

Interestingly, there were only six instances of the stock also closing in the bottom third of the day’s range, as it did yesterday—not enough evidence to hang your statistical hat on, but perhaps worth noting, anyway. In these cases, CARA rallied the next day five out of six times, although some traders may wonder if this was just another potential deception, since after two weeks the stock was lower four out of six times.

First impressions may be helpful in job interviews, but in the markets, they’re often bait for unwary traders. Patience and thorough analysis can help traders avoid getting hooked by a flashy, but often misleading, price action.

Today’s numbers include (all times ET): Mortgage applications (7 a.m.), Durable Goods Orders (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Ulta Beauty (ULTA), Box (BOX), Dick's Sporting Goods (DKS), Splunk (SPLK), Snowflake (SNOW), Salesforce.com (CRM).

Today’s IPOs include: RenovoRx (RNXT).

 

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1 TheStreet. Cara Therapeutics Stock Jumps; FDA Clears Severe-Itching Treatment. 8/24/21.
2 All figures based on Cara Therapeutics (CARA) daily price data, 1/21/14–8/24/21. Supporting document available upon request.

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